Bond Fund Allocations instead of an annuity

[hurricane harry]

If you have to worry about it, just get the annuity and be done with it.

[OrcasIslandBound]

If you use Fidelity RIP (retirement income planner) you'll notice that an annuity, if included, actually is shown with shrinking dollar payouts over time. So, if you trying to buy an annuity for longevity ins, you should consider the effect of inflation as Fidelity does. Makes annuities far less attractive.

[audreyh1]

Quote:

Originally Posted by HadEnuff and this is why I want some LT; if yields go down the LT will lock in relatively higher yields and higher share price... No? Yes?

Nothing will be "locked in". It will always be temporary.

[OrcasIslandBound]

LT bonds have a relatively constant payout, but their value goes up while their % yield goes down with falling interest rates. The payouts remain almost entirely constant through these yield changes. More so than midterm bonds.

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[papadad111]

Quote:

Originally Posted by HadEnuff As I look at my nestegg, by my calculations, if I were 50% allocated in Vanguard's Bond funds: 1/3 of that in each of the Short term, Intermediate Term, and Long Term ( SEC yields of 1.27,2.75, and 4.19 respectively, for an overall yield of 2,74), that yield added to my SS would essentially provide the "floor" I need to survive. the other 50% I was thinking of putting into the Vanguard Total Market Fund (VTSAX). That will provide the "gravy". All of these funds are in IRAs. I have a chunk of after tax money, about 10% of my total holdings, that I'm not figuring into these calculations. That is my "if I goofed this all up and I need cash" money. I'm 62, DW is 58. An overall 3.2% of my IRA pot combined with SS will give me my "gravy" retirement. Any reasons not to fund my "floor" this way, as opposed to an annuity?

Seems like you could also do an 80/20 stock to cash AA and achieve your 2.74 percent floor income level just with broad market equity dividends. The 20 percent cash would see you through any anomalies. You would have very solid inflation protection in theory and likely could hit your "lavish" retirement withdraw percentage of 3.2% in most years too.

Your WR is low enough that I'm not sure I would want to trade off equity risk for the risks associated with bonds and/or annuities in this case.

[HadEnuff]

Quote:

Originally Posted by audreyh1 Nothing will be "locked in". It will always be temporary.

Yes, of course. The LT funds have average maturities of 10 years or more. Average "duration" on one fund, for example is 13.4 years, and "average effective maturity" is 23.7 years. (BTW, I don't understand the difference between those two things. But I understand the overall picture which is that the fund is invested in longer maturing bonds),
So, yeah, it's "temporary" but we are looking for some stability over maybe 30 years, after which the temporal nature of my existence will render all of this moot.

[HadEnuff]

Quote:

Originally Posted by papadad111 Seems like you could also do an 80/20 stock to cash AA and achieve your 2.74 percent floor income level just with broad market equity dividends. The 20 percent cash would see you through any anomalies. You would have very solid inflation protection in theory and likely could hit your "lavish" retirement withdraw percentage of 3.2% in most years too. Your WR is low enough that I'm not sure I would want to trade off equity risk for the risks associated with bonds and/or annuities in this case.

I don't think I have the stomach lining for such an allocation. I'm seeking to reduce the risk associated with heavy stock allocation.

[nun]

Quote:

Originally Posted by HadEnuff Right now it seems to me investing in an annuity product is the essence of making a long term investment at historically low interest rates, in historically low interest rates. Unless I'm missing something, which is quite possible.

You don't invest in an annuity (or if you think you can with a VA you are making a big mistake) it's insurance that you buy. You get a guaranteed income based on how much you spend, some prevailing interest rate and mortality credits.

[hurricane harry]

it is possible we could see negative interest rates in the US


annuities are not a disaster

[nun]

Quote:

Originally Posted by hurricane harry it is possible we could see negative interest rates in the US annuities are not a disaster

Back in the good ol' days of summer 2015 when the Dow Jones was at 18k I had the opportunity to buy into my state's pension and start income in 2016. Part of my reason for doing it was that the market and PE10 were high and the predictions for the next decade's bond returns were pretty low. I'm not usually a numerologist, but they definitely factored in.

[OrcasIslandBound]

I wouldn't be surprised to learn that a state pension retirement plan might be a much better deal than buying an instant annuity on the open market today.

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[nun]

Quote:

Originally Posted by OrcasIslandBound I wouldn't be surprised to learn that a state pension retirement plan might be a much better deal than buying an instant annuity on the open market today. Sent from my Nexus 4 using Early Retirement Forum mobile app

You are correct, the numbers made the buy in an easy choice, but with the volatility in both the stock and bond markets I can see insurance companies being able to use that to sell their products. An SPIA might be a useful product to buy in some circumstances, but I hope people don't buy VAs and I still don't think bonds are an alternative to an annuity because they are such different things.

[OrcasIslandBound]

On one hand, I probably will never buy an annuity of any kind. On the other hand, I have a small pension which I can take as an annuity from my megacorp. It will pay about 6k a year starting next year. I compared it to instant annuities and found it to be a bit better. So I'll probably do that. I did include it in the Fidelity simulations that I ran and noticed that it will shrink to about 2k by the end. That's OK with me as I need more money earlier anyway.

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[HadEnuff]

Quote:

Originally Posted by nun You don't invest in an annuity (or if you think you can with a VA you are making a big mistake) it's insurance that you buy. You get a guaranteed income based on how much you spend, some prevailing interest rate and mortality credits.

I think of it as an investment. I may be able to guarantee an income, but I can't guarantee what that income will provide in terms of purchasing power, unless I buy a COLA annuity, which are really really expensive.

So I'm looking at the issue much as I looked at life insurance and disability insurance. There was a time in my life when I needed to buy those products for my and my family's security, but eventually I had enough assets to self insure.

A lot of the possible market /economic scenaria that would make an annuity a good gamble, would also have a positive effect on a balanced bond portfolio. And significant inflation would be no better served with an annuity than with a bond fund, in the current interest rate environment, which IMO makes buying an annuity right now a tough bargain.
Assuming one has enough assets to maintain some flexibility.

[nun]

Quote:

Originally Posted by HadEnuff So I'm looking at the issue much as I looked at life insurance and disability insurance. There was a time in my life when I needed to buy those products for my and my family's security, but eventually I had enough assets to self insure.

This is a good point. If you have more than 20x annual income saved up you probably don't need to buy the longevity/income/sequence of return insurance of an annuity. At close to 20x or as you get a bit older the annuity might be useful. If you have less than 20x income you should just keep working or saving or cut your budget.

If you are around 20x and see a bond allocation as a substitute for an annuity that's I think that's a false alternative as their risks are very different.

[Trooper]

Quote:

Originally Posted by pb4uski For example, for the intermediate term Admiral bond funds, the regular fund yields 2.38% and the corporate version yields 3.58%, 1.20% more and the durations are similar (6.5 vs 6.4). Similar story for the short term bond, 1.25% vs 2.29%, a 1.04% difference and the same 2.7 duration.

pb4uski - Are the short and intermediate corporate bond funds you mention VSCSX and VICSX respectively? I noticed that VICSX has a 0.25% front load - I wonder why?

[Gone4Good]

Quote:

Originally Posted by HadEnuff I think of it as an investment.

It's certainly a financial product with a variable return. It's just that in this case your ROI is determined by how long you live . . . and that is something you have a bit of direct control over**. You also have an asymmetric information advantage relative to the seller.

There's not many financial products in the world with those features, whether we call them investments or something else.



** Some health care studies have found that offering small monetary rewards can have large impacts on people's healthy lifestyle choices. Maybe that's a possible benefit of buying annuity - an incentive to do whatever you can to increase your ROI and take the insurer to the cleaners.

[Lsbcal]

If I were to proceed on a non-standard allocation, I would like to see how it performed in the past environments. I would try to construct a model portfolio. Actually I'd try to compare a few portfolios to see how they did in various good and bad periods. Without this information all you have is other's opinions here. Not something to hang onto in a crisis.

At the bare minimum, I would look at how that LT bond component did in the rising rate period starting around 1953. The Fed data is probably available. You will have to convert yields to returns. I know some of the data for the 2yr Treasury and 5yr Treasury is available.

If this all seems too much, ask yourself "do I really want to go into this not knowing the past?". BTW, I've done this for my investment approach which is highly non-standard.

[OrcasIslandBound]

Lsbcal, Excellent idea to back test model portfolios! I have done this for a simplified investment mix of VTI and BND a few years back when I did so badly during the 2008 crash. I used yahoo finance to get all the values and dividends. I then used Matlab to simulate it all. That process helped me to define my strategy of staying at about 45% stocks going forward. But I don't know how to get raw data for LT bonds going back to the 50's. Also, I believe that BLV will be similar to a single bond in that after the duration has passed, subsequent to an interest rate rise, it will reach the same value it started at when including dividend reinvestment. This becomes a judgment and the 4% vs 2.2% is compelling.

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[pb4uski]

Quote:

Originally Posted by Trooper pb4uski - Are the short and intermediate corporate bond funds you mention VSCSX and VICSX respectively? I noticed that VICSX has a 0.25% front load - I wonder why?

Yes, those were the two I was referring to. Dunno why the 0.25% front-end fee but the ER is really low 0.10% so that might have something to do with it.

The webpage says "The fund assesses a 0.25% fee ($2.50 per $1,000) on purchases. The fee is paid directly to the fund and therefore is not considered a load." I guess it is technically different from a front-end load since the money goes into the fund and therefore increases the NAV (but not noticeably).

As a long term investor the 0.25% fee would not concern me especially since the ER is only 0.10%.